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How I see it londoner7, as we pay out the Capex then get back 100% of it from Magnus income then you must recognise that, when thinking of BP getting 50% of Magnus FCF as they don't till we have recouped the Capex outlay. So this recouped element increases our FCF as Capex has already been paid out. After it has been recouped our FCF will fall as we then pay BP 50% on 75% of Magnus till they have had $1 billion. Hope I am correct as I have again topped up with shares in the ISA
PRDaynes, I understand your first sentence, but I don't understand your 2nd sentence, 'So FCF will include 100% of Magnus till Capex we make on it is recouped.'
I concur with londoner7 we run the show now but after all costs including capex share any profit on the 75% of Magnus with BP the other 25% is ours outright. So FCF will include 100% of Magnus till Capex we make on it is recouped.
My understanding anyway.
Re: drilling at Magnus
Last year I wondered about the impact of development drilling on the agreement with BP. The conclusion I came to is that ENQ is the operator and free to develop the field as they see fit, while retaining liabilities to BP, including the repayment of the vendor loans and a profit share up to $1B pre-tax ($600m post tax).
Cash flows for profit sharing are after all costs, operating and capital costs. The benefits of maintain or accelerating cash flows through development accrue to both parties. The more effective that ENQ manage Magnus the quicker BP gets repaid, and the sooner ENQ accrues 100% of cash flows. The flip side is that while BP are responsible for decommission costs up to and including the two wells drilled in 2018, Enquest is responsible for the full decommission costs of subsequent development.
PRDaynes - so you're saying that BP will pick up the costs of the drilling at Magnus? And then we split the profits - with ENQ incurring the ongoing costs.
Not to be forgotten that the capex costs of drilling more wells at Magnus will also be recovered at 100% to Enquest before the 50/50 profit split.
Pelle, e121, Ajes,
Thanks for you replies. I understand your views but something still bugs me about the arrangement and its accounting. Perhaps the 2019 accounts will clarify things for me.
60pparty: Oil @ 80USD H2 would be great for Enq FCF if so there will be a 60p party and I would like to come!
Londoner: epiphany121 explained what I was refering to.. 100MUSD were shielded from profitsharing during 2019 when this isnt the case for 2020 the FCF will be lower..
All the best!
L7 - "In 2019 $100m of Magnus cashflow, before the profit share, was used to reduce the contingent liability for the acquisition of the 75% interest in Magnus. This did not contribute to FCF or reduction in net debt.". THis isn't correct. Excluding the circa $20 mill vendor loan repayment for 2019, the first $100 mill of net cash flow (post Capex/Opex) from 75% Magnus went straight to Enquest and then remainder of the net cash flow was split 50-50% between BP and Enquest.
This year, all of the net cash flow from 75% Magnus (after the $20 mill Vendor loan repayment) is split 50-50 between BP and Enquest. Say there was a net cash flow of $150 mill from 75% Magnus for each of 2019 and 2020, In 2019, Enquest would've received $125 mill and in 2020, Enquest would receive $75 mill. To state the obvious, where we would end up in 2020 in terms of FCF is riding a lot on how the Coronavirus spread pans out in the coming weeks. I continue to believe that we'll see the peak in the coming weeks and the economic activity trough in China will be Q1. Fingers crossed.
Hi L7,
My take on Magnus last year if you exclude the 100 mill vendor loan to be repaid over 5 year.
First approx 2/3 of the year Enq got 100% FCF of the 75%.
Last 1/3 of the year they got 25% + 75/2%.
= 62,5%
So 2019 equal approx 70%.
2020 Enq continue getting 62,5% but with slight less interest rate at the vendor loan.
So maybe 6-7% less FCF for Enq from Magnus.
Ajes, this component is interesting '-no repayment on Magnus 100MUSD consideration'
You rate it as a negative to 2020 cash flow.
In 2019 $100m of Magnus cashflow, before the profit share, was used to reduce the contingent liability for the acquisition of the 75% interest in Magnus. This did not contribute to FCF or reduction in net debt.
In 2020 this $100m component of Magnus cash flow will be shared with BP. Enquest's share will contribute $50m to FCF thereby reducing debt, rather than the contingent liability.
Is this interpretation correct?
Ajes,
We will have to wait and see !
To many unknowns. I bet you one thing though , POO will not stay at these levels.
Once it's accepted that US share has had it's day POO will rise.
What FCF for 2020 if POO moves over $70 For H2 2020 ?
Or over $80 ?
I think you are wrong to assume POO will be lower for 2020. To early in the year to claim that.
ALL THE best
Jan
FCF 2020 vs 2019:
-lower production
-lower oilprice
-no repayment on Magnus 100MUSD consideration
+lower Magnus Vendorloan repayment
+lower Capex.
+Kraken premium (The big question).
+lower interestpayments
? Working capital movements
=> FCF 2020 lower then 2019 (=361MUSD). But how much lower? FCF=300MUSD?
Hi HMH,
Thank you for your intervention.
I've looked at this a couple of ways and reached the same conclusion as you. FCF, which as far as I am concerned is the most important metric is $411m for 2019 (excluding WC movements). I'd be interested if any posters here see it differently.
But looking at 2020 I think we see the same outcome, all other things being equal.
I stated $311m + $110m = $421m.
You see it as $411 + (($290m - $100m) - ($230m - $50m)) = $421m
Or correct me if you I've presented it wrong.
Of course there are other factors and we'll get a better handle on these with the accounts.
A key thing for me is that I'm still bugged by a comment the Barclays guy made about 2020 cash flows compared to 2019. However, if it is off a higher 2019 FCF base then I'm less concerned.
Hi L7,
"Net debt reduction" should be FCF, my bad. We payed $100m of 2018 expenditures and deffered $50m of 2019 expenditure.
Net +$50m, add that to the net debt reduction and you get a neutral FCF of $411m for 2019 with no working capital movements.
Full year report will be interesting.
Best, HMH
HMH,
I take your point about the phasing and deferment from previous years. I have considered this. The conclusion I came to was that I needed to put a stake in the ground and work from there. I came to ENQ in early 2019 and the closing net debt for 2018 was $1,774m so that was my starting point. My forecast of 2019 cash flows took account of the forecast for $275m CapEx. If I was coming to the party today I'd put a new stake in the ground.
That said, I don't see how you can claim $411m debt reduction in 2019. But at the moment I do agree with your view that FCF should be higher in 2020 - I'm waiting for a look at the closing accounts.
Talking of a party, I'm off out for a beer.
Cheers, Londoner7
The Fcf improvement during 2019 when compared with 2018 is even more stunning because 2018 was indeed higher than what it should have been. The 2018 fcf was if I remember correct 220m usd or thereabouts but in reality 100m or whatever it was less as you say the capex was deferred into 2019. So we had an almost 3 fold improvement in fcf 2019 v 2018
Appologies. Last sentence should read "Also means that FCF-generation should top last years, not the other way around."
L7,
If you're going to reflect on the phasing of capex entering 2020 you better do it for 2019 as well.
"Approximately $100 million of 2019 cash capital expenditure relates to a combination of deferred payments agreed with suppliers in prior periods and phasing of cash payments from 2018 to 2019 (primarily relating to DC4)."
So your "real" net debt reduction is $411m, double your forecast. Also means that FCF-generation should top next year, not the other way around.
Best, HMH
Oops, my mental arithmetic isn't what it used to be.
$170m (230-50) in 2020, equal to a reduction of $120m
Should be, $180m (230-50) in 2020, equal to a reduction of $110m.
60pPARTY, thanks for your comment.
Londoner7,
Thanks for that. Interesting post.
Nice to read your posts, always interesting .
Cheers
Some good closing numbers with a better, than I expected, reduction in net debt by $361m. But a couple of items stood out for me that I don’t think have been commented on here – apologies if I’ve missed it.
Cap Ex for 2019 is $35m below forecast ‘primarily due to phasing from 2019 in to 2020’ but the CapEx forecast for 2020 is $230m, ‘with approximately $50 million of 2020 cash capital expenditure relating to a combination of deferred payments agreed with suppliers in prior periods and phasing of cash payments from 2019 to 2020.
I take a number of things from these statements:
The $50m is effectively 2019 CapEx so my debt reduction number is 361-50 = $311m for 2019 – beating my $210m forecast last May substantially.
Balance the $35m against the $50m indicates that Capex, excluding deferments and phasing, was $15m higher in 2019 than forecast.
However, my expectations for a greater debt reduction in 2020 were centered on a reduction in CapEx from $275m in 2019 to $150m (my forecast) in 2020, equal to a reduction of $125m. Taking the revised numbers I have $290m (275+15) in 2019 and $170m (230-50) in 2020, equal to a reduction of $120m – not far off my original expectations. But to be clear this is an additional debt reduction to the $311m ‘real’ debt reduction number not the $361m posted.
Of course, key will be the production volumes and oil price – I’m still on same again as 2019 until I see more detail in next months update and the impact of the bug on oil price. Other moving parts in the cash flow number won’t be clear until the 2019 accounts are posted.
The 2nd item that stood out was this comment, ‘a continued strong performance from Magnus’. Very few posters, L3Trader is one, has highlighted the miss against the RI forecasts for oil production in 2019. 16,789 bopd forecast against 14,607 bopd achieved, assuming an optimistic 16K bopd for Dec. Equivalent to approx.. $25m cash net to Enquest. The RI forecast for 2020 was 19,094 bopd – let’s see if there’s any clarity at the March update. Tower one fixed, tower two and new wells?
Overall, I’m happy with my Enquest investment and the fact that the SP has held up so well against the current oil price suggests the market is warming too.